Financial Guidance - How Could I Fulfill My Future Obligations?

Q. I am a regular reader of your magazine. I am into business and my wife is also working (govt job). We have a son (age 8 years) and daughter (2 years old). Our total monthly income is Rs 60,000.

1. We have 5 LIC policies. The annual premium is Rs 50,000.
2. One ULIP SBI Life Insurance (Equity Optimizer Fund) Rs 40,000 (in this year).
3. Recently Started SIP Birla Sun Life Frontline Equity Fund @ 1,000 per month.
4. I have also invested in 500 shares RPL@ Rs 143 per share, 400 JP Associates @ Rs 97 per share,  250 Idea Cellular @ Rs 71 per share, 200 Power Grid @ Rs 93 per share, 50 L&T shares @ Rs 1055.
5. Home loan EMI is Rs 23,063/- for 20 years. I would like to have your views and suggestions on the above. I also want to invest Rs 5,000 per month in various MFs for the best education and future of our kids. My wife will get arrears soon. Should I return home loan or invest in stocks/MFs. Please advise.

J. K. Sharma, on email

A. Sharmaji, the number of policies you have is not relevant. What is important is the amount of cover that you have for your life. Very often I see that the premium paid is considered more important since these are considered as ’investments’ and not protection. Typically, the amount of cover one should have must be sufficient for all the needs of your family in the event of your premature death. These needs range from funding children’s education to marriage and living expenses. To this, you add your liabilities and reduce accumulated savings. This is how the amount of life cover needed is decided. These amounts turn out to be pretty large and hence cheap term insurance is chosen as the ideal product.

I observe that you have made more investments in buying stocks directly than in mutual funds. Unless one is confident and experienced in making logical buy-sell decisions, a mutual fund is better. You could enlarge your SIP and include more funds in the portfolio. But ensure that you have a balance of equity and debt. A simple rule to follow is to invest monies needed only after 3-5 years in equity funds and the balance in debt funds/deposits.

The concept of ‘Best education’ can differ from parent to parent! The cost depends on whether you would like to save for a degree in science or commerce; medical or engineering. Medical education is the most expensive today, at about Rs 40 lakh. What I have given below is assuming Rs 10 lakh is the cost in today’s rupees and then calculated what it might cost when your children are 17 years old (due to inflation). Use the figures as multipliers depending on your wishes! Also given is the SIP in a balanced portfolio of 50 per cent debt and 50 per cent equity funds.



Prepayment of home loans from arrears should be based on the following:

1. If the servicing of the loan (EMI) is causing a strain on your monthly cash flows.
2. The rate of interest is more than what you can earn from other avenues.
3. Job security should also be considered. If one feels any insecurity, then better to prepay with your bonus than to be loaded with a liability and no inflows.